Stock Drop Suit Filed against McGraw-Hill over S&P Ratings

June 18, 2009 ( - McGraw-Hill Cos. has been hit with a stock drop lawsuit alleging its shares were artificially inflated because subsidiary Standard & Poor's (S&P) used a faulty rating system to assess collateralized debt obligations (CDOs) and residential mortgage backed securities (RMBS).

The suit, filed by three McGraw-Hill employees in federal court in New York, requests that the matter be certified as a class action on behalf of all McGraw-Hill employees who invested their 401(k) plan accounts in McGraw-Hill stock between December 31, 2006, and December 5, 2008.Because of the business practices alleged in the suit, plaintiffs claimed, McGraw-Hill stock dropped from a high of $68.02 per share to a low of $24.23 share, a 64% decline, during the time period covered by the complaint.

Plaintiffs allege S&P’s ratings of CDO and RMBS products were predisposed toward higher grades in part because McGraw-Hill did not have or take a look at enough information at the loan level to accurately rate such investment products.McGraw-Hill was predisposed to issuing higher ratings to CDO and RMBS products to generate financial service fees because the company was aware that investment banks would hire the credit rating agency providing the best ratings for such products, the suit alleged.

“McGraw-Hill, with the tone set at the top, pushed short-term earnings at the expense of reputation and its long-term horizons and the huge reputational risks,” the complaint charged.

McGraw-Hill and fiduciaries of its 401(k) plans are charged with breaching their duties under the Employee Retirement Income Security Act (ERISA)  by keeping investment in McGraw-Hill stock when the stock was an imprudent investment due to the faulty credit ratings of CDO and RMBS products (see McGraw-Hill Investigated for Company Stock-related Fiduciary Breach ). Plaintiffs claimed McGraw-Hill should have known of the potential issues with having company stock in the 401(k) plans because of governmental investigations and news reports about the problems with the credit risks of CDOs and RMBSs.

As of December 31, 2007, the 401(k) plan held $181 million in investments in McGraw-Hill stock, and S&P’s 401(k) plan held approximately $9.3 million in McGraw-Hill stock.

The complaint, Sullivan v. McGraw-Hill Cos.,  S.D.N.Y., No. 1:09-cv-05450-UA, is available here .